Stryker Pulls The Trigger

Funny how rumors work. There were widely-spread rumors that Stryker (NYSE: SYK) and Boston Scientific (NYSE: BSX) were talking deal, with Stryker being seen as a likely buyer for BSX's neuromodulation business.

Well ... the rumors were partially right. Stryker and Boston Scientific did announce a deal, but in a real twist Stryker decided to buy BSX's neurovascular business for $1.4 billion in cash and potentially another $100 million in earn-outs. Unlike the neuromodulation business, which largely involves pacemaker-like devices that deliver controlled electrical pulses to nerves or tissue to control conditions like pain, the neurovascular business involves stroke treatment and prevention, with a suite of products including wires, catheters, balloons, and embolic coils.

It's a curious decision. Neuromodulation is sometimes seen as a logical fit with orthopedics since so much of the demand for the devices is in pain relief following unsuccessful back surgery. Moreover, BSX's under-investment in this business and flagging competitiveness relative to Medtronic (NYSE: MDT) and St. Jude (NYSE: STJ) had many looking at it as a solid fix'er-up/turnaround opportunity.

In the neurovascular business, Stryker is buying a unit that should produce in excess of $300 million in revenue and has been a market leader. Unfortunately, BSX has been losing ground to competition from ev3 (now part of Covidien (NYSE: COV)) and Micrus (now part of Johnson & Johnson (NYSE: JNJ)). Part of the problem here is a lack of innovation and simply falling behind in terms of product performance. Although there has been some optimism about new devices that will roll out over the next couple of years, the general thought has been that Boston Scientific was dangerously close to becoming a "has been" - at least in terms of leading-edge devices.

I have to give BSX credit, though, and that is not something I do often - they got a fine price for this unit. While there is absolutely every chance that this can be a lucrative unit for Stryker, it will need some work and Stryker will be competing against large and experienced rivals. So, to get 4.5x sales (assuming the full earn-out) for the unit, BSX did well. By comparison, Micrus got a multiple of about 5.2x, while ev3 sold out for a similar amount.

To an extent, Stryker had to do this deal - they need to inject more growth into the business, and neither orthopedics, surgical instruments, or hospital equipment are likely to do it. What's more, there are not too many obvious alternatives for the company - wound care is a tough business, and entering robotics (presumably by buying Intuitive Surgical (Nasdaq: ISRG)) would have been enormously expensive.

For BSX, the cash will be welcome and can either go towards paying down debt or identifying some small early-stage tech ideas for acquisition.

All in all, it's amusing to see how the conventional rumors were wrong on this deal. It's also an interesting sign of what lengths Stryker needs to go to to get growth these days; while the stock looks cheap maybe I need to reconsider some of my growth assumptions.

Disclosure - I own shares of JNJ